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Crowd funding industry booms, but questions asked

ELEANOR HALL: In the United States, it helped to elect a president. In the commercial field as well, crowd-funding has gone from strength to strength, as websites allow entrepreneurs to draw small amounts of money from many to individuals to raise large capital funds.

But financial regulators and commentators are now raising concerns about the crowd funding model.

Will Ockenden has our report.

(excerpt from internet advertisement): I want to introduce you to my new kick-starter project.

WILL OCKENDEN: It's the latest internet sensation.

(excerpt from internet advertisement): I was thinking one day that the light bulb is amazing. It's probably one of the greatest inventions of all time. But how…

But unlike normal light bulbs, you can't yet own it, or even buy it from the shop.

Development and manufacturing costs are funded up-front by individuals on the internet, via a website called Kickstarter. If the light bulb is eventually produced, only then will backers get what they paid for.

The process is called crowd-funding, and it's a booming industry.

BRYCE IVES: We had a theatre show that we wanted to fund. We needed to raise $10,000 and we exceeded that amount.

WILL OCKENDEN: Bryce Ives is the artistic director of the theatre company Present Tense.

BRYCE IVES: The genius of the crowd funding platform is it involves people. It lets them see all of the information.

WILL OCKENDEN: One piece of research for the US crowd funding industry says it raised more than $1.5 billion worldwide last year.

But as the industry grows almost exponentially, it's attracting concern from financial regulators.

Last month, Australia's financial watchdog the Australian Securities and Investments Commission warned the local industry.

EXCEPT FROM ASIC STATEMENT (voiceover): Depending on the particular crowd funding arrangement, ASIC's view is that some types of crowd funding could involve offering or advertising a financial product.

These activities are regulated by ASIC and may impose legal obligations on operators of crowd funding sites and on people using those sites to raise funds.

WILL OCKENDEN: Rick Chen is a co-founder of Australian crowd-funding website Pozible.

RICK CHEN: Crowd funding's actually not investment at all, at least not in the way that we operate, so it's purely based on pre-purchase of products. So you're not allowed to offer any financial returns.

WILL OCKENDEN: US company Kickstarter has allowed many successful fundraising campaigns.

But as the industry matures, and as people discover it's a way to advertise and raise cash, it's also suffered failures.

RICK CHEN: I think the crowd funding is a fantastic idea in certain situations. I don't think it's a great idea for funding products.

WILL OCKENDEN: Felix Salmon is a financial journalist, blogging for Reuters.

FELIX SALMON: If what you're doing is going to (inaudible) a movie, or album, that makes a lot more sense. The marginal cost of giving someone a download of a song is zero.

But if you're talking about creating products I'm not at all convinced that Kickstarter and crowd funding is a particularly effective model and in fact no-one has really managed to prove that it works yet.

The first one to have a huge amount of success on Kickstarter was an iPhone dock. There are still people waiting for their iPhone dock, even as the iPhone 5 has been announced.